Good Golly,
Miss Moly
Bob Molyarty
(oops,
I mean Moriarty)
August 9, 2004
Gold
is for the mistress - silver for the maid
Copper for the craftsman cunning in his trade.
"Good!" said the Baron, sitting in his hall
But iron - cold iron is the master of them all.
-Rudyard Kipling
For as long
as I can remember there has been a very well-known silver cheerleader
calling for silver to rocket to between $50 to $100 an ounce.
It's as if there is some permanent shortage of silver and for
some reason known only to him, no one will ever mine it again,
so it's going to the moon. But I can't remember him ever saying
anything about all the other commodities out there which might
go up. What significance is $100 silver if gasoline is $200 a
gallon and a loaf of bread costs $50. He never ever mentions
what is going to happen to the price of other commodities when
the Fed finally destroys the dollar and we have transferred our
entire manufacturing base overseas.
So when I got
an email on Friday I thought about him. The email commented about
other precious metals. In the last year "the price of zinc
is 31% higher, copper is up 45%, lead is up by 76%, molybdenum
is up 200%, gold is up 12% and coal is ahead by 16%."
Sounds to me like moly is about as precious as you get.
I recently got back from a two week long tour
of various mines and properties. And just by chance the last
I visited was the Atlin molybdenum property of Adanac Gold
Corp. - (AUA-V $.54
Canadian 15,000,000 shares outstanding, about $8 million market
cap ANCGF-OTCBB) - in Northern British Columbia just NE of Atlin
Lake. Reputedly the most beautiful region in all of Canada.
And just for your information, so you
will never ever forget the name of this company, Adanac
is Canada spelled backwards.
Hard to remember, easy to spell. Molybdenum is easy to remember,
hard to spell and even harder to pronounce. But if you like precious
metals, you need to consider molybdenum.
Adanac... the name sorta rolls off your tongue. And just to be
one step ahead of those who will write me about the misleading
title of this piece, I do this deliberately... even though all
of my readers know I don't ever write about girls, when I add
girls' names to the titles more people read the pieces. Wonder
why that is?
80% of moly goes to harden steel and to produce
stainless steel. And while moly in its native state is a flaky,
soft metal, it takes over 4700 degrees F to melt, compared to
2700 degrees for iron. Another 20% goes into speciality chemical
applications such as lubricants for oil drilling and refinery
catalysts.
The price of moly goes
up and down like a bride's nightie and this fluctuation has resulted
in the curtailment of development plans for primary moly mines
over the past 25 years. In the past 15 years, the price of moly
has been as low at $1.82 and as high as $17.50. China has changed
from being a net supplier to a net consumer in the past two years
and prices for moly have tripled as Chinese steel mills have
been running 24/7.
It's a truism
in the mining business that all mines go through four or five
owners before being developed. Adanac's Atlin moly property probably
has them all beat. Placer gold was found back in 1898 at the
mouth of Ruby Creek where it runs into magnificent Atlin Lake.
As the miners worked the entire area looking for minerals, molybdenum
was found on the surface in 1905 at the head waters of Ruby Creek.
But moly had only been discovered in 1878 and there was little
demand at the turn of the new century. As time went by, new uses
were found for moly and demand increased. But moly is often found
in conjunction with copper and 76% of moly is produced as a byproduct
of copper mining. As the price of copper goes up, we can expect
more moly to come on the market.
In 2002, at the very bottom of the moly market in terms of both
demand and price, Adanac CEO Larry Reaugh spent $4,000 (Canadian)
staking the property. His timing couldn't have been better. The
property has had about $15 million spent on it between Kerr Addison
and Placer Dome. In 1971, Kerr did a feasibility study based
on a drill program showing 152 million tons grading .063 Mo.
A sudden drop in the price of moly prevented them from going
into production. It's important to note that they had to put
up 100% of the money to earn a 60% interest and still would have
had to pay a 3.5% NSR. So 100% of the investment would have gotten
them about 50% of the profit.
In 1978 and
1980, the new owners, Placer Dome, conducted both a scoping study
and a stage II feasibility study. Placer only owned 70% and still
faced the 3.5% NSR. They concluded on the basis of 212 drill
holes and about 32,000 meters of drilling they could process
14,000 tons of material a day and have a payback of 14.1% with
a moly price of $6.75 and the dollar at $.90. In the end, Placer
Dome walked as moly dropped again.
But Adanac owns 100% of the project for the $4000
cost of staking when no one could ever imagine anyone actually
wanting to produce moly as a primary product. And with the higher
prices for moly and moly oxide, Adanac is conducting a 30,000
foot drill program. They have all the data from Kerr and Placer
Dome but to conform to 43-101 standards, they have to twin the
holes already drilled.
Reaugh anticipates a 20,000 ton a day project producing in the
neighborhood of 10 million pounds of moly oxide per year. He
plans a winter scoping and prefeasibility study but back of the
envelope calculations show maybe a $200 million dollar cost to
get into production. That's a lot of money, gold mines are often
cheaper. But the longer moly prices hold above $15 the better
the project works.
Right at a year ago, I
wrote a piece on
Sterling Mining after a short visit to Coeur d'Alene Idaho. In
it, I showed how if you compared the price of Sterling to the
price of other companies, Sterling was worth somewhere between
$5.37 and $23.75 a share. Sterling rocketed from $1.10 to $14
before settling down to about $6.35 a share.
Well folks, I thought a lot of Sterling CEO Ray Demotte buying
silver in the ground for $.002 an ounce. But the deal of the
century has to be Larry Reaugh gaining 100% of Ruby Creek for
four grand. Sterling is selling for about 6% of its known metal
value in the ground (186,000,000) ounces. But Adanac is selling
for less than .5% of its known metal value. Adanac is cheaper
today than Sterling was a year ago.
That isn't
going to last for long. The longer the price of moly stays above
$15 a pound, the easier it is going to be to get someone to commit
to a long term price guaranteed product. If one of the Chinese
companies buying up large quantities of iron ore signs a deal
with Adanac, the project will be dead easy to finance without
diluting the shares.
It will be
another month before Adanac get assays back, when I was there
they had just finished the 1st hole, going down 1185 feet. When
Placer Dome took over the project, they just assumed they would
go with the pit design from Kerr. It called for a 500 foot deep
pit. So Placer Dome drilled 500 feet and not an inch more. Every
hole bottomed in mineralization. I can't tell you how stupid
I think that is. It's typical big company stupidity. Drill holes
which bottom in mineralization don't tell you anything about
the dimensions of the system, all they do is define the short
interval drilled. You have to drill into barren rock before you
start to understand the limits of an ore body.
The first hole
Adanac drilled was a twin of a 500' hole drilled by Placer. But
Adanac drilled 1185 feet, about 140% longer than Placer's hole.
There's an excellent chance there is more moly there than Placer
figured. No one knows how much more metal there is in place but
Larry Reaugh is at least smart enough to realize he needs a lot
more deep holes. It may require moving the pit, but a mine with
a 50 year life is a hell of a lot easier to finance than a mine
with a 25 year life. Once you have paid your sunk costs in a
mine, your profit goes way up.
This is not to say there are not issues. There
are issues. The town of Atlin, right on the eastern edge of Lake
Atlin, is tiny. 75 people in winter growing to 300 in summer.
No one knows how large a staff the mine would require, it would
be about 15 miles from town. But it would change the town and
people often resent change, even when they are financially better
off.
Some of the people
in Atlin would welcome a permanent mine, some wouldn't. The government
of BC hasn't been mine friendly for years but even the bureaucrats
have begun to come around. It's easier to permit a mine now than
it would have been a few years ago.
Building a
mine with its associated plant and equipment requires more power
than Atlin now generates. There has been some talk of putting
in a hydro-electric plant and putting the entire area on the
BC power grid. That's an important cost issue.
I'd guess off
the top of my head that there are maybe 10 nice moly projects
at various stages. You will be reading a lot about moly over
the next few months as well as uranium. Each is up about 200%
in the last year. Price increases such as that tend to suck minerals
out of the ground. Larry guesses, at this point, that $6 moly
would make for a profitable mine. $16 moly makes for profits
right out of the park. But everyone with a property with any
moly is thinking the same thing. Demand is about 140,000 MT a
year and this would add 5,000 MT a year, hardly enough to change
price. But if ten projects move along, the first two or three
will make a lot of money, the next two or three will become marginal
and depending on what stage they are at when moly prices come
down, may get moved to the back burner and the last two or three
are wasting money. It's a horse race with a great pot and the
first horse across the finish line collects.
Of all the moly projects
I've read about, I think Adanac is the most advanced. It's been
to feasibility twice and almost went into production twice when
the payback wasn't nearly as good as Adanac's 100% ownership.
I'd guess Adanac has a year's head start right now. The winter
pre-feasibility study isn't brain surgery, all they have to do
is feed the numbers into an already-existing spreadsheet. If
they can keep their lead, they will soon have a mine. The pre-feasibility
is primarily to bring the existing data up to 43-101 standards.
And since they
have fairly solid numbers already, they can leap ahead of the
pack on a permanent basis if they can lock up a customer who
wants a long term commitment. You may believe that the management
of all those 24/7 steel mills in China and Japan are pulling
their hair out right now trying to come up with a dependable
source of moly. Some metals literally are on the verge of running
out such as copper and for all purposes, moly has run out and
the price could double or triple from here easily.
Any base metals
major who wants moly will be looking at Adanac very closely.
So the stock has a giant potential yet is priced as if moly isn't
economic. It is. It is indeed.
Adanac is an
advertiser. We participated in a recent private placement and
as such have a vested interest in the success of the company.
I like the management, I like the project and I love Atlin lake.
This article neither suggests buying or selling any stock. It's
your money, do your own due diligence.
August 8, 2004
Bob Moriarty
President:
321gold Inc
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